Should investors look to infrastructure funds as an income play?

Institutional investors, such as large pension funds, have traditionally used infrastructure assets as a long-term diversification tool, with the added benefit of generating an income.

In a white paper produced by the Organisation for Economic Co-operation and Development (OECD), ‘Trends in large pension fund investment in infrastructure’, author Raffaele Della Croce notes: “Only in the past two decades, investors have started to recognise infrastructure as a distinct asset class. Since listed infrastructure tends to move in line with broader market trends, it is a common held view that investing in unlisted infrastructure although illiquid, can be beneficial to ensure proper diversification.

“These investments are expected to generate attractive yields in excess of those obtained in the fixed income market but with potentially higher volatility.”

Now retail investors are latching on to the trend and diversifying into infrastructure funds as a way to boost the income being generated from an investment portfolio.

Thomas Becket, chief investment officer at Psigma Investment Management, recently bought into GCP Infrastructure, an investment trust that focuses on stable assets such as hospitals and schools.

He explains: “Demand for infrastructure assets is currently extremely high, as the worlds’ investors struggle for income in this low yield environment.

“This fund is a good example of how we can find opportunities to exploit in changing markets. Here, as investors, we are replacing the banks who used to lend to this sector but who now need to restrict/conserve capital and can only lend small amounts.

“In return for lending to such infrastructure trusts, you can receive an income of roughly 8.5 per cent to 9 per cent, with some inflation protection on certain contracts.”

However, not all infrastructure funds will provide that much-sought-after income. Open-ended funds such as the JPMorgan Emerging Markets Infrastructure, First State Global Listed Infrastructure and CF Macquarie Global Infrastructure Securities invest in the shares of transport or water companies, for example, and focus on capital growth rather than income.

Jason Hollands, managing director at Bestinvest, explains: “It’s important to recognise that these are essentially specialist equity funds which own the likes of listed transport, energy and water companies – and their focus is primarily on total return rather than income, so the yields are considerably lower than the listed physical infrastructure funds.”

Jenny Lowe is features editor at Investment Adviser